12/13/1999 @ 12:00AM

Iron Wills

WHO’S RESPONSIBLE FOR THE mess at minimill operator Birmingham Steel Corp.? Including the effect of an asset writedown for a division to be sold, the company lost $224 million on sales of $710 million in its fiscal year ended June 30. At a recent $6.75, the stock is off 77% from its 1994 high. Birmingham’s credit is so poor that all eight of its mills are pledged to the banks and bondholders.

Ask Chief Executive Robert Garvey, 61, for an explanation, and he jerks his thumb in the direction of his predecessor, James Todd Jr.: “The reason Birmingham Steel has been doing so badly these last few years is because of the legacy of Todd’s bad decisions.”

Pointing a finger right back at him is Todd, the West Virginian who built Birmingham from a two-mill bolt shop into the top producer of reinforcing bar for concrete. “If I’m responsible for what’s going on in Birmingham, it’s because I put that clown in the job,” says Todd, 71.

So much for collegiality among steel men. In July Todd launched a proxy contest for control of Birmingham. If Todd and his backers, known as the United Group, win written consent of the majority of outstanding shares by the annual meeting on Dec. 2, Garvey is out.

Quite a turn of affairs from four years ago, when Todd handpicked Garvey to succeed him, calling Garvey the “most qualified guy in the [steel] industry to run a public company.”

Garvey’s rsum was impressive. He had built North Star Steel, a division of privately held Cargill, into the second-biggest minimill operator behind Nucor Corp. (a minimill starts with scrap rather than ore). Then, as Todd watched Birmingham shares drop over the past 18 months, he started wondering how to evict Garvey and his eight directors.

The answer came in June, when trouble surfaced at Nucor Corp. The minimill, which has grown into the second-biggest U.S. steelmaker, fired its highly respected chief executive, John Correnti, 52.

Nucor’s current chairman, David Aycock, claims that the $4 billion (sales) company was adrift, having grown too big for Correnti’s decentralized management style. Before he left, Correnti had 22 people reporting to him.

“It’s hogwash. Having a lot of direct reports was what made Nucor great. Everyone wanted to emulate us,” says Correnti, who insists his sacking was an ego-driven power play. Only six months earlier the board had forced the retirement of F. Kenneth Iverson, 73, its chairman and founder and Correnti’s mentor. “I think they were jealous of Ken getting the credit for Nucor’s success. It was only a matter of time before they got me,” Correnti says.

The morning that Todd heard the news of Correnti’s ouster, he called him up and offered him the top job at Birmingham, if they could win a proxy fight. Correnti couldn’t turn it down. For one thing, it was a chance to prove he could successfully run a steel company outside Ken Iverson’s shadow. And if they do win, Correnti will get $600,000 in base salary, a bonus equal to 1% of Birmingham’s net income (before depreciation, interest and taxes) and 1 million options priced at $4.88 and vesting over five years. The package would make Correnti the second-most-highly-paid steel executive, behind Thomas Usher of USX-U.S. Steel Group, a company with nine times Birmingham’s revenues.

Garvey isn’t about to let the United Group gain control. He hired the scorched-earth New York public relations firm Kekst & Co. to counterspin the dissidents’ claims of financial mismanagement and to impugn Correnti’s reputation. A Kekst-produced Powerpoint presentation making the rounds of institutional shareholders asks, “Who is John Correnti?” and answers the question with accusations of a poor safety record at Nucor and repeated costly delays in mill startups.

The accusations are falling on deaf ears. “If you look at John’s body of work in the steel industry, I don’t think there are too many people who have a more impressive record of achievement,” says Michael Michalisin at Deutsche Banc Alex. Brown.

The focus of the proxy battle and the source of Birmingham’s financial woe is the division that makes high-grade bar steel for critical applications like seatbelt bolts and motor shafts. The garden variety bars would be used to, say, hold up the roof at a Wal-Mart. The price difference is considerable: about $300 a ton for ordinary rebars; as much as $2,000 a ton for the high-strength stuff.

Entering the high-quality bar market was Todd’s idea, but Garvey executed the strategy. The plan called for integrated steel production. A joint venture plant in Convent, La. would produce direct reduced iron (a high-grade scrap substitute) to feed a melt shop in Memphis that would produce cast steel for a bar and rod mill outside Cleveland.

Problems began piling up. Scrap prices fell 50% in the past two years. The melt shop in Memphis couldn’t take advantage, as it was locked into buying 300,000 tons per year of direct reduced iron from Convent at an annual cost penalty of $9 million. The Convent plant is now shut down, having defaulted on its $180 million in debt. Birmingham has written off its $30 million equity in Convent.

Meanwhile, the Memphis melt shop has gone through three managers and one technical glitch after another. Four years from the time Todd built the mill, Memphis is producing at only half of its 900,000 tons of annual capacity. That forces the Cleveland mill to buy more costly steel on the open market.

In August Garvey threw up his hands and announced the sale of the high-grade bar business. Without it, Birmingham would have earned $3 million in fiscal 1999 instead of losing $224 million. But the timing smelled fishy: It came a couple of weeks after Todd launched his proxy fight.

Garvey claims he has had Credit Suisse First Boston looking for at least a year for a way to fix, merge or sell the Cleveland-Memphis operations. But the decision to sell came as a surprise, because Garvey had been moving forward on all of Todd’s plans. As late as April Garvey told a gathering of securities analysts that Memphis had “turned the corner.” Now he says it will take at least $100 million to make Memphis competitive.

Correnti says it’s a management problem, and that Memphis can be fixed for $15 million. What Correnti may not be able to fix so easily is Birmingham’s trashed balance sheet. Its obligations, including bank debt and leveraged leases, total $700 million, or 3.3 times shareholders’ equity. Nucor has never had debt even as much as half of equity.

Yet investors seem to be rooting for the dissidents. The stock ran up 70% in the three weeks prior to the United Group announcing its proxy contest and has since held steady.